In court documents, the department said the action was necessary because the health maintenance organization failed to maintain the legally required amount of $17 million to $18 million in net assets. Its assets fell steadily from $16.1 million in May to $5.9 million in July.

"There just does not seem to be a point of return," said Daniel Zingale, head of the state agency that regulates California's HMOs.

Competition from other HMOs in the area may have been behind Lifeguard's financial woes, Zingale said.

Lifeguard officials did not return several calls for comment Friday.

The action came less than a month after Blue Shield of California, based in San Francisco, pulled the plug on its planned acquisition of Lifeguard. Neither side would comment on why the deal, which was first announced May 30 and called off Aug. 19, fell through. Blue Shield officials declined to comment on Friday.

Despite Lifeguard's financial troubles, Zingale said the plan has managed to continue to reimburse the physicians and other professionals in its medical network. But, he said, the state is required to step in to protect consumers when an HMO becomes financially insolvent.

Zingale said the state's goal is to keep the plan going as long as possible to allow the members to transfer to other plans.

According to court documents, Lifeguard as of July 31 reported a cash balance of $31.7 million and total liabilities of $73.5 million, creating a working capital deficit of more than $40 million.

This is the fourth time the state has had to take over a health plan since the agency began operating about two years ago.

In October 2001, the state seized Tower Health, a plan based in Long Beach. Earlier, it took control of Watts Health Foundation and Maxicare Health Plans, both of which were based in Los Angeles.